Saturday, April 26, 2014

It is a virtually impossible task forecasting long-term
price movements in property markets for small economies, like Ireland. The
reason is that there are simply too many moving parts all with huge volatility
built into the numbers. Take for example normally stable time series such as
population. In the case of Ireland, wild swings in terms of net migration over
the recent years saw 2006-2008 annual average net immigration of 80,300 per
annum switching into a net annual emigration of 31,633 per annum in 2010-2012.
While total change in 2007-2013 population in Ireland was 108,000, net
migration swing was 111,930. You get the point: what we think the potential
demand might be is not an exact science and in the case of Ireland it is not
really much of any science whatsoever.

So setting aside actual economic models, what can we say
about future property prices trends?

We can do a couple of simple dynamic exercises. Suppose that
we are getting back to pre-crisis ‘normal’. This can mean pre-2001 rates of
growth in prices or it can mean Celtic Garfield rates of growth. Many would say
‘The Bubble days are over’. So they may be. But suppose they are not. Suppose
the rates of growth that prevailed over 2004-2007 are to return. The logical
question is: if the boom were to come back, how long will it take property
prices to recover? This is obviously a wildly optimistic scenario. But let’s
entertain it, shall we?

Below I provide a table of estimated years by which current
(end of 2013) prices indices for Irish residential property are likely to
recover their real (inflation-adjusted) peak values consistent with pre-crisis
years. In other words, the table shows years by which we can expect the crisis
effects to be finally erased.

Take 3 scenarios:

Scenario 1: assume that from now on, average annual growth
rates for property prices run at their 2004-2007 averages and that inflation
averages 1.5 percent per annum (CPI). Adjust the pre-crisis peak for inflation
that accumulated between 2007 and present.

Scenario 2: assumes the same as Scenario 1, but adjusts
inflation expectation forward to 2 percent instead of 1.5 percent.

Scenario 3: assumes the same as Scenario 1, except we also
take into assume average rates the average for 2004-2007 and 2012-2013 to
reflect the popular argument that 2012-2013 years growth rates reflect
‘recovery’ in the markets, aka a departure from the crisis.

The last line in the table shows the average duration of the
period of recovery – averaged across 3 scenarios. This means that the average
is ‘geared’ or ‘leans’ more heavily toward Scenarios 1 and 2 which are by far
much more optimistic than Scenario 3.

Do note that all three scenarios are wildly out of line with
what we should expect in the long run from the property prices – appreciation
at inflation + 0.2-0.5 percentage points margin.

Click on the table to enlarge

Key takeaway:

You might think we are in a recovery, but be warned – even under
very unrealistically optimistic price growth projections – the effects of this
crisis are likely to prevail well beyond 2025 in Dublin and beyond 2030
nationwide. Now, enjoy the property supplements and financial ‘analysts’ op-eds
telling you that everything is going on swimmingly in the markets…

Disclaimer

This blog represents my personal views and is not reflective of the views or opinions held by any company, contractor, client or employer I work for currently or have worked for in the past. These views are not an endorsement to take any action in the markets or of any political position, figures or parties.

“It is not true that people stop pursuing dreams because they grow old, they grow old because they stop pursuing dreams.” Gabriel Garcí­a Márquez

Nassim Nicholas Taleb was asked whether public protests in Athens is a Black Swan Event. He replied: “No. The real Black Swan Event is that people are not rioting against the banks in London and New York.”

"Getting worse more slowly is not the same as getting better", Prof. Brad DeLong